As Fed and OPEC Issue Speed Limits, Markets Drive On

Attention, citizens! Here are the New Commandments, as handed down by your Federal Reserve Board:

I) Thou shalt not spend thy money on new homes, cars, major appliances or anything else that might boost the economy or otherwise result in a wider gap between demand and supply. (Los Angeles Clippers tickets, naturally, aren’t covered by this commandment.)

II) Thou shalt not give thy money to banks, because too many bankers are lending, or thinking about lending, to poor credit risks who probably won’t make their payments when the next economic downturn hits. Not that the Fed wishes for an economic downturn, of course.

III) Thou shalt not buy bonds, because doing so could drive long-term interest rates lower, which would make mortgages cheaper, allowing more people to buy homes. (Please refer to First Commandment.)

IV) Thou shalt not give thy money to charities, because charities could use that cash to help people get off the public dole, get new training and get jobs, and there are already too many people working, leaving the unemployment rate far too low. Obviously.

V) Thou absolutely positively shalt not buy stocks, because the stock market is the root of the “wealth effect” and various other evils.

End of New Commandments.

I have opted to help the Fed by delineating the above, before the central bank officially releases them. How do I know I’ve got these commandments right? Because I’ve been carefully listening to all of Fed Chairman Alan Greenspan’s many speeches over the last few months and the comments of his Fed cohorts.

It has become quite clear that there is very little you can do with your money, if you have any to spare, that would be OK with the Fed today. You shouldn’t buy big-ticket items that would fuel stronger economic growth, you shouldn’t bank it with reckless bankers, and Lord knows you shouldn’t be bidding up already-inflated stock prices with it.

The Fed chairman, any Fed chairman, is often nicknamed “Dr. No.” But Greenspan is becoming “Dr. No . . . Nothing . . . Never!”

If you piece together Greenspan’s recent speeches, it would appear that the best place for your money right now, in his view, is under your mattress.

(But do not go out and buy an expensive new mattress for this purpose; the old one will do just fine.)

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Thankfully, there are some groups out there with other ideas about where our excess cash should go. The Organization of Petroleum Exporting Countries, for example, is offering to continue to serve as an alternative recipient of U.S. earned income.

Crude oil prices last week topped $34 a barrel before settling back a bit to end the week at $31.76 in New York. That’s still up handsomely from $25.60 at the start of the year. And no one needs reminding of how that has translated at the local Unocal or Arco station.

Although some OPEC members, as well as some non-OPEC producers such as Mexico, are talking about boosting output to put a lid on prices, it’s hardly in their interest to send oil back down to the $12-a-barrel level that prevailed a year ago. The days of truly cheap gas are probably just a fond memory now.

And although it’s easy to be angry with OPEC, if we were in their shoes, wouldn’t we want the best possible price for our primary export?

Payback, as they say, is hell, and the resurgence of oil prices is payback for 1997 and 1998, when oil tumbled amid the Asian economic crisis.

The income lost by oil producers in that period was a wealth transfer directly to American oil consumers’ pocketbooks.

Now, wealth is flowing in the other direction. And classic economic theory tells us that soaring oil prices should be inflationary, which, in turn, should be bad news for financial markets.

But in many stock markets around the world, investors seem to be paying as little attention to the oil threat as they are to the Fed’s threat of higher U.S. interest rates.

The last time the Fed was tightening credit significantly, in 1994, equity markets in general were hammered. But last year, when the Fed’s rate campaign began, major share indexes from Mexico to Germany to Japan rocketed anyway. And so far this year, many key markets are continuing to advance, even as Greenspan grows more gruff.

Still, those index gains may be misleading. Just as in the U.S. market, foreign investors are rabid for technology and telecom names this year, and their tremendous gains are masking weakness in many other shares.

In the German DAX stock index, for example, Deutsche Telekom alone accounts for about 23% of the index. That stock has soared 34% this year. In Mexico, the IPC share index is dominated by TelMex, which accounts for 28% of the index and is up about 31% this year.

(By contrast, in the U.S. Standard & Poor’s 500 index, Microsoft is the biggest stock, but it accounts for just 4.4% of the index.)

Of course, in the investment world, sometimes you should just take what you’re given. For many U.S. owners of foreign stock funds this year, any gain is welcome, especially when held up against the dismal performance of the S&P.;

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Within the S&P;, it became painfully clear to many “old economy” investors last week that higher oil prices are beginning to bite. Procter & Gamble saw its shares lose nearly 40% for the week after the consumer products giant warned that rising materials costs are depressing the company’s earnings outlook.

On Friday, P&G; rival Dial Corp. said much the same thing and saw its stock fall 23% in a day, to the lowest price in three years.

With three weeks to go before the end of the first quarter, we are now in the “confessional” period in which companies that know they aren’t going to meet Wall Street’s earnings expectations step up and admit their sins.

If there are a lot more P&Gs; and Dials out there--and that’s a reasonable assumption--the destruction of old-economy stocks is likely to continue for the foreseeable future.

Greenspan and the Fed will only make matters worse for those stocks if, as expected, the central bank raises its key short-term interest rate again at the next Fed meeting March 21.

Scott Grannis, chief economist at Western Asset Management in Pasadena, likes to refer to Greenspan today as a “buffalo hunter.”

Like the Great Plains buffalo hunters of old, Grannis says, Greenspan and the Fed would dearly like to corral the entire economy and bring it to heel. Instead, Grannis argues, the Fed’s efforts to raise rates are bringing down only the oldest and/or sickest buffalo (i.e., the old-economy companies and debt-burdened businesses).

The young and healthy buffalo--the new-economy companies--are easily outrunning the Fed, Grannis argues.

Funny, but that is exactly how investors are viewing things today--and why the Fed’s New Commandments are falling on so many deaf ears.

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* DOW MAKE-OVER

Readers respond to suggestion of remaking the Dow Jones average. C6

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Tom Petruno can be reached at tom.petruno@latimes.com.

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Fear of Fed? It’s Limited

The last time the Federal Reserve was aggressively raising interest rates--in 1994--the fallout slammed most foreign stock markets harder than the U.S. market. Not this time: Most foreign markets soared last year and are up sharply again this year, despite the Fed. Changes in key indexes, in local currencies:

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Pctg. change 1999 YTD Market/index in 1994 change change Mexico/IPC -8.7% +80.1% +14.7% Germany/DAX -7.1 +39.1 +14.6 Taiwan/weighted +17.4 +31.6 +11.6 France/CAC-40 -17.1 +51.1 +9.3 Hong Kong/Hang Seng -31.1 +68.8 +5.1 Japan/Nikkei-225 +13.2 +36.8 +4.3 U.S./S&P; 500 -1.5 +19.5 -5.1 Singapore/Straits Times -11.1 +78.0 -15.5

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Source: Bloomberg News